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I bond rate slashed nearly 2 percent

The I bond, the savings bond designed to make sure your return doesn't lose out to inflation, is looking mighty unattractive for the next six months.

I bonds purchased between now and the end of October 2002 will earn a composite rate of just 2.57 percent. That rate includes a 2-percent fixed rate and an annualized inflation rate of 0.57 percent.

The 2.57 percent composite rate is a steep drop from the 4.40 percent rate set last November.

The U.S. Treasury sets the fixed rate and the inflation rate every May 1 and Nov. 1. The fixed rate you receive when you buy an I bond is good for the 30-year life of the bond. The inflation-indexed premium is adjusted every six months.

The EE bond, which also receives a new rate every six months, is now at 3.96 percent, down from 4.07 percent last November. The EE bond is now known as the Patriot bond.

Daniel Pederson, president of BondHelp.com and author of Savings Bonds: When to Hold, When to Fold and Everything In-Between, says he's surprised the Treasury didn't increase the I bond's fixed rate, which has been at 2 percent since November 2001. Increasing the fixed rate a bit would probably encourage more people to buy.

"Historically, the I bond needs a fixed rate of 2.6 percent or higher to outperform the EE bond. I give the edge right now to the EE bond. If the long-term decision is to put money in a safe investment, I would lean to the EE bond, the Patriot, for the next six months."

Pederson says the reason the I bond rate dropped so much compared to the drop in the Patriot bond is because the I bond rate is tied to inflation, which has been unusually low, while the Patriot bond is pegged at 90 percent of the average yield of the five-year Treasury note for the last six months.

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"If we get normal inflation over the next six months, say 2.55 percent, then the I bond will pop back up to 4.5 percent in November," Pederson says.

If you already have an I bond, the only change that affects you is the inflation premium. The inflation premium you receive changes every six months.

For more detailed information on I bonds and how they work, read this Bankrate story.

-- Posted: May 2, 2002

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See Also
Series I bonds: Your protection against inflation
'Patriot Bonds' come marching in
More savings stories



 
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